Basel III prompts industry rethink on corporate lending

By: William Clarke | 28 Mar 2012

European banks are reassessing the economics of corporate lending, ahead of Basel III, according to a survey by Greenwich Associates.

Facing capital reserve requirements in Basel III that will reduce margins on loans, European banks are conducting bottom-up reviews of how they treat corporate borrowers, according to the results of Greenwich Associates 2011 European Corporate Finance Study.

Banks across the region have begun segmenting their clients based on profitability. Greenwich Associates consultant Jan Lindemann said: “We anticipate that over time these divisions will become evident among European companies. At the very least we expect that companies will become bifurcated into one group of large companies whose relatively heavy use of advisory services, capital markets, treasury services, and other bank products make them ‘profitable’ enough to banks to warrant credit provision, and a group of less attractive companies that experience disruptions in existing lending relationships, less consistent access to credit in the future, and significantly higher prices.”

Greenwich Associates expects that the new capital reserve requirements enforced by Basel III will hit mid-tier banks hardest, eroding their already slim profit margins. Greenwich Associates consultant Tobias Miarka said: “In the past credit crisis, when the global and pan-European banks were forced to retrench, European companies in need of credit were able to turn to national and regional banks that still had relatively strong credit ratings. It is unclear if the mid-tier banks would be able to step up in the same way under the new capital reserve rules. More generally, it is still an open question whether Europe’s smaller national and regional banks will be able to compete and survive as significant active lenders to large corporates under Basel III.”